SEC Blocks High-Leverage Crypto ETFs, Citing Regulatory Limits

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The U.S. Securities and Exchange Commission (SEC) has halted applications for crypto exchange-traded funds (ETFs) offering more than 200% exposure to underlying assets, sending warning letters to several issuers including Direxion, ProShares, and Tidal. The agency cited provisions under the Investment Company Act of 1940, which restrict the amount of leverage a fund may take relative to its unleveraged "reference portfolio."

"The fund's designated reference portfolio provides the unleveraged baseline against which to compare the fund's leveraged portfolio for purposes of identifying the fund's leverage risk under the rule," the SEC stated in its letters. The letters instructed issuers to reduce leverage before applications could be reviewed, effectively blocking 3x–5x leveraged crypto ETFs in the U.S. for the time being. Bloomberg described the pace of the letters’ publication as “unusually speedy," signaling the SEC's desire to alert investors to the risks associated with high-leverage products.

The regulatory action comes in the wake of a sharp sell-off in the crypto market in October, which triggered $20 billion in liquidations — the largest single-day liquidation event in the market's history. Data from Glassnode shows that average daily long liquidations have jumped from roughly $28 million in the previous cycle to $68 million, while short liquidations have increased from $15 million to $45 million per day. Analysts at The Kobeissi Letter commented that "leverage is clearly out of control."

Leveraged ETFs differ from crypto derivatives such as futures or perpetual swaps in that they do not use margin accounts or trigger automatic collateral calls. However, they reset exposure daily, which can accelerate losses in volatile or sideways markets. The SEC expressed concern that funds exceeding the 200% threshold carry structural risks that exceed current regulatory allowances.

The SEC's move coincides with growing investor interest in leveraged crypto ETFs, particularly following the 2024 U.S. presidential election, as traders sought amplified exposure without using offshore derivatives or margin accounts.

ETF providers may attempt to revise filings to comply with the 200% limit, while higher-leverage products are likely to remain on hold unless regulations change. Until then, offshore derivatives and existing futures markets remain the primary avenue for traders seeking greater exposure.

The decision underscores the SEC's cautious stance on complex financial products in crypto markets, highlighting ongoing debates about leverage, investor protection, and the integration of digital assets into mainstream financial systems.